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## During the last few years, Harry Davis Industries has been t

Thesis Help Finance During the last few years, Harry Davis Industries has been t

# During the last few years, Harry Davis Industries has been t

During the last few years, Harry Davis Industries has been too constrained by the high cost of capit… Show more During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, capital costs have been declining and the company has decided to look seriously at a major expansion program proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task: The firm’s combined federal and state corporate income tax rate is 35% Harry Davis’s outstanding bonds indenture terms are 8% coupon, semiannual payments, and callable bonds with 15 years remaining to maturity. The bond currently sells for \$1,060.00 with a face value of \$1,000.00 per bond. The bonds have a 5 year call protection period. If called, the bond would be called the call price would be \$1,075. New bonds would be privately placed with no flotation costs. The current price of the firm’s 10%, \$100 par value, perpetual preferred stock is \$116.95. Harry Davis would incur flotation costs equal to 4% of the proceeds on a new issue. Harry Davis’s common stock is currently selling at \$50 per share. Its last dividend (D0) was \$3.12, and dividends are expected to grow one year at 15% then the dividends are expected to grow at a constant rate of 5.8% forever. Harry Davis’s beta is 1.3, the yield on T-bonds is 5.6%, and the market risk premium is estimated to be 4%. Harry Davis has 40,000 bonds outstanding; 60,000 shares of preferred stock outstanding; and 1,200,000 share of common stock outstanding. (1 pt.) What is the required rate of return on outstanding common stock assuming you use the CAPM to estimate the rate of return? (2 pt.) What is the rate of return on outstanding common stock assuming you use the Dividend Valuation Model for estimation? (1 pts.) What are the market value weights that should be used to calculate the firm’s WACC? (1 pt.) Are market value weights better than book value weights in estimating the WACC? Explain. (1 pt.) What is your estimate of WACC assuming you use the rate of return on equity calculated using the Dividend Valuation Model and no new capital is issued to meet budget demands? (1 pt.) What would be the rate of return on newly issued preferred stock? • Show less

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